2010 January 01 Friday
Financiers Profited From Government Bail-Outs

A New York Times story on former Goldman Sachs investment banker and former US Treasury official Neel Kashkari’s move to bond investment house Pimco reveals much about how US government bail-out policy helped many big investors. Pimco made $1.7 billion off of securities price appreciation when the US government decided to fully protect the value of Fannie Mae and Freddie Mac bonds.

It was also hard, however, not to notice that Pimco was a direct beneficiary of the Treasury Department’s actions. In 2008, when it appeared that Fannie Mae and Freddie Mac might fail, Mr. Gross saw an opportunity.

He moved Pimco’s flagship Total Return Fund heavily into mortgage-backed securities guaranteed by the two agencies. Then he vociferously advocated for the government to rescue them during television appearances on CNBC and elsewhere. On Sept. 7, 2008, the fund’s value soared by $1.7 billion when Mr. Paulson announced the government takeover of Fannie Mae and Freddie Mac. As part of his government duties, Mr. Kashkari worked on that rescue effort.

I wonder how much Goldman Sachs made off of that move and ditto for Bank Of America, Citibank, and the government of China for that matter.

That Pimco profit from the Fannie and Freddie bail-out is small stuff as compared to the $12.9 billion that Goldman Sachs made and/or avoided losing when the US government decided to make good on all the bond insurance policies that AIG had foolishly sold for pittances.

Goldman Sachs, which set a Wall Street profit record of $11.6 billion in 2007 and may have earned $11.4 billion this year, according to the average estimate of 15 analysts surveyed by Bloomberg, won new and larger concessions from taxpayers in 2008. This time it was the threat of a financial meltdown that prompted the U.S. government, with Paulson as Treasury secretary, and the Federal Reserve to supply an unprecedented amount of aid to firms deemed critical to the financial system, including Goldman Sachs.

The 140-year-old company received $10 billion in capital, guarantees on about $30 billion of debt and the ability to borrow cheaply from the Fed. The Fed’s bailout of American International Group Inc., and its decision to pay the insurer’s counterparties in full, funneled an additional $12.9 billion to Goldman Sachs.

I'd like to know what other large sums of money were made from the AIG and Fannie/Freddie bail-outs. It is my impression that some pretty big European banks were saved by the US government spending big on the AIG bail-out.

The worst thing about these bail-outs is not the profits earned by Goldman Sachs and Pimco at our expense. No, there's something worse that portends poorly for the future: These financial titans will be more reckless in the future because their financial contracts with big, weak, foolish counterparties did not cause them to lose billions of dollars. The moral hazard here is that the bubble will be even bigger next time and when Peak Oil hits the financial house of cards will really collapse next time.

Share |      By Randall Parker at 2010 January 01 01:42 PM  Economics Financial Regulation

Mercer said at January 1, 2010 4:46 PM:

"I'd like to know who other large sums of money were made from the AIG and Fannie/Freddie bail-outs. It is my impression that some pretty big European banks for were saved by how the US government spent big on the AIG bail-out."

Yes European banks got billions. For the details go to www.sigtarp.gov and look up the audit report for November 17, 2009. A table is on page 20. I don't know why more people have not complained about US taxpayers bailing out foreign banks. Perhaps the concept of credit default swap counterparties is too difficult for most of the media to understand.

I don't think Pimco was a factor with Fannie and Freddie. They have always been considered quasi government institutions.

Llyod Blankenfein said at January 1, 2010 7:36 PM:

Well, Randall. Goldman Sachs has a lot of people on the inside of the government. The number
of Goldman alumni in the corridors of power is pretty extensive and they've been pretty well
established for quite a while. I'm not a conspiracy theorist, but I seriously do believe that
former GS employees have actively been crafting government policy to enrich their company.

When Lehman Brothers ran into difficulties, Secretary Paulson (former Goldman CEO# passed over Lehman #Goldman's chief competitor) when it was evident that the company would collapse without financial help, which triggered the financial collapse. Paulson also previously let another chief competitor Bear Stearns go under the bus. When AIG, who was ensuring much of Goldman's risk, was about to go under, only then did Paulson step in with a GENEROUS bailout. And get this - before bailing out AIG, who did Paulson consult with? Of all the financial industry CEOS, he only consulted with Llyod Blankfein - current CEO of Goldman Sachs.

And who did Paulson put in charge of disbursing the bailout money? Neel Kashkari - Goldman Sachs alumnus.

Old Goldman Sachs CEO doesn't bailout Lehman or Bear Stearns, but bails out Goldman's insurer after consulting with new Goldman Sachs CEO. Seriously, it doesn't get any worse than this.

Goldman Sachs makes our economic policy, Israel makes our foreign policy, Mexico makes our immigration policy. As Steve Sailer remarked, U.S. policy can be summarized as thus: "immigration, imperialism, insolvency."

Steve Johnson said at January 2, 2010 1:00 AM:

It's even worse than you say. You can't even stop GS or MS from blowing up the financial system by letting them fail; if they fail, the people who run them simply walk with the billions that they've pocketed.

"I don't think Pimco was a factor with Fannie and Freddie. They have always been considered quasi government institutions."

By whom? If everyone knew that Fannie / Freddie debt was backed by USG then Pimco doesn't buy cheap because there wouldn't be a spread between Fannie / Freddie and Treasuries. On the other hand, if some connected firm doesn't buy cheap, maybe Fannie / Freddie debt wasn't as USG backed as some people thought. It's an inherently corrupt and corrupting situation.

Mike said at January 2, 2010 4:41 PM:

Here's a nice summary of the real cost of the bailouts:

O'Brien said at January 2, 2010 4:42 PM:

Both the Republicans' sucking up to corporations and the Democrats' grossly over-insclusive, bland anti-business propaganda are to blame, in my opinion. It is difficult for most people to distinguish the financiers who are moving money around (and at the same time skimming enormous amounts for themselves) and people who are actually innovating.

I think the Nazis were essentially right to despise money handlers, even if it was largely for the wrong reasons (all the racial/anti-Semitic bullsh*t). There's no reason that anyone at a place like Goldman Sachs should be making $43,000,000 in a year (especially a year with a major taxpayer funded bailout!), except that they can.

The simple leftist/Marxist approach of saying capitalism is bad is nonsense. Yet the Righteous Right's butt-kissing to Wall Street makes no sense either.

Someone like Bill Gates, who actually did innovate, whatever Microsoft's flaws, does not bother me nearly as much as say, Jon Corzine, who is a complete hypocrite in addition to being a worthless pile of crap (well maybe his work has been worth a couple million, to be optimistic, but not nearly the astronomical millions he actually got--I sure as hell won't say "earned" in the case of a hypocritical sleazebag such as Corzine).

Matt@occidentalism.org said at January 2, 2010 11:18 PM:

Dennis Kuchinich had it right when he questioned Kashkari in a congress committee meeting. He said, “I don't think anyone questions, Mr. Kashkari, that you're working hard. Our question is who are you working for?”

Well, now we know.

You can find the video of the exchange on youtube. It won't let me post the link here.

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